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Stewart Information Services earnings take a hit

Drop in mortgage-servicing revenue causes the sharp reduction

Steady improvement in the residential resale market at Stewart Information Services Corp. (STC) was not significant enough to balance out a drop in mortgage services revenue.

The real estate service provider's third-quarter net earnings hit $15.4 million, or 63 cents a share, down $19.3 million from $34.7 million, or $1.45 a share, from the third quarter of 2012, the company said.

"Our third quarter 2013 financial results reflect a changing industry environment. The ongoing improvement in the housing market, with the attendant reduction in distressed properties, resulted in our mortgage services revenues declining more than previously expected," said Matthew Morris, CEO of Stewart.

"Notwithstanding these factors, we remain committed to the long-term achievement of our strategic objectives of direct title market share growth and repositioning our mortgage services segment to focus on sustainable origination and servicing support," Morris added.

Pre-tax earnings for the third quarter fell to $29.6 million, dropping $9.8 million from the third quarter 2012's $39.4 million. The decline is a direct result of an approximate $13.8 million reduction from the prior year quarter in the mortgage services segment.

It is not only default services, it's lower volumes in refinancing as well. That is industry wide, Ryan Byrnes, stock analyst with Janney Capital Markets, explained.

Byrnes noted that there are just fewer mortgages in default right now, and rising real estate prices and plenty of government programs have helped lower that.

"Our mortgage services operation continued its transition to a provider of broad-based outsourcing services, and while that transition is yielding lower than desired short term results, we are confident in our strategy as we continue to expand relationships with existing clients while using broader service offerings to attract new clients," Morris said.

Furthermore, total revenues for the third quarter hit $536.8 million, increasing $16.1 million, or 3.1%, from $520.7 million for the same period a year ago.

While title revenue increased 7.1% in the third quarter 2013 from year ago levels, mortgage services revenues tumbled 36.5%.

"It is just part of their business," Byrnes said. "It can be easily offset by rising purchase volume. The purchase market is going to start rebounding into the next year."

"We are sensitive to changing mortgage regulations and any potential impact on mortgage demand. Whatever the conditions, we will maintain our focus on reducing our cost structure, simplifying our operations and aligning our organization to our customers' needs," Morris said.

"We believe this is the best answer for capitalizing on a dynamic environment, and will produce consistent financial results over the long term," Morris added.

This news comes on the heels other top industry companies scaling back their businesses due to a drop in refinance applications and mortgage servicing demand. Citigroup (C) declined to comment on a recent article in Bloomberg that alleged the bank is selling its mortgage-servicing rights amid looming Basel III regulations. 

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